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Succession Planning

Succession Planning. Changing of the Guard. Presentation Outcomes 5 Benefits. Better understand succession planning Implement your own staff incentive program Identify growth opportunities from clients Optimise your business value Sell on your terms. Succession Planning What is it?.

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Succession Planning

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  1. Succession Planning Changing of the Guard

  2. Presentation Outcomes5 Benefits • Better understand succession planning • Implement your own staff incentive program • Identify growth opportunities from clients • Optimise your business value • Sell on your terms

  3. Succession PlanningWhat is it? • Planning for the transfer of ownership and/or management of the business • It’s more than just selling your business

  4. Who Should Plan? Accountants • relying on the sale of their business to fund retirement • whose business is their major source of income and wealth • wanting to retain and motivate staff • wishing to improve life balance • with a business to sell

  5. Why is it important now?The Past • Low entry cost, little competition, many opportunities • Operationally focused, not thinking about succession • Retirement plan selling business for the best price

  6. Why is it important now?The Future • High acquisition costs, more competition, barriers to entry • Successors heavily mortgaged due to home ownership aspirations • Gen Y attitude, staff not interested • Many more businesses for sale

  7. What you need to doPrevention is better than cure • Plan well in advance • Take the time to document a plan • Be in control, don’t have your choice imposed upon you • Be aware of a possible value gap

  8. Business Value Gap5 Questions • Current business value? • Business value needed at sale? • Shortfall? • How long will it take to bridge the gap? • Can you afford to sell?

  9. *Extract from Bstar’s Business Value Gap Worksheet

  10. Nearly double the expected date to sale!!

  11. Value Drivers Optimising your business value

  12. Business Value Drivers • Not reliant on the owner • Quality clients • Innovative and different • Benchmark performance • Good systems • Succession planning • Loyal and committed staff

  13. Staff Improvement Programs Effectively managing staff is a key issue for EVERY Accountant

  14. StaffRisks • Staff leaving • Staff becoming or being recruited by a competitor • More stress and workload • Client dissatisfaction • Higher employment costs • Reduced business value • Succession restrictions

  15. Generation YLess Loyal, More Transitional

  16. Attracting • Tailor your recruitment strategy to match your favoured source of labour supply • Testing • Think, feel & do • Organisational Infrastructure Strategy • Structure to achieve your strategy direction • Life Balance Charter

  17. RetainingDo you offer? • Employee tokens • Loyalty bonuses for years of service • Deferred bonuses for future investment • Employer of choice program

  18. Retaining * Extracted from the Guide to Effective Succession Planning

  19. MotivatingProfit and Value Improvement • Prepare financial budget • Determine financial benefits from improvement program • Determine potential bonus pool • Calculate net contribution to the business • Calculate potential increase in profit and value

  20. MotivatingRewarding Performance • Identify staff for incentive arrangements • Jointly determine objectives and deliverables • Jointly determine criteria and bonus calculation • Document terms and conditions • Manage the process • Keep it simple!

  21. Quantitative Gross fees Write offs Productivity New clients Tax effective investments Qualitative* Client relationship Staff management Marketing Technical competency Personal development MotivatingPerformance Criteria * Criteria can be supported by information schedules

  22. MotivatingBonus Payment Calculation

  23. MotivatingBonus Payment Entitlement

  24. Motivating Monitoring Performance

  25. Growing Value You may need to grow before you go

  26. Acquisition Pricing Model Financial Services Consulting Client Succession Planning IT Business Efficiencies Growth Options Plan

  27. Planning for Growth • Strategies • Take control of your growth • Make sure your growth goals are realistic and achievable • If your growth plan requires major changes in the way you do business it will need to be carefully planned • Succession • Growing your business may close your value gap • Change focus for partners close to retirement • Career management choices for young professionals

  28. Why Client Succession Planning? • Protect and grow fees • 3 new substantial streams of revenue • Succession (1), Advice (2) and Financial Services (3) • Baby boomer clients will want to discuss succession • Retain and grow fees by advising generational successors • Competitors are becoming aware of the opportunity

  29. Step 1 Identify client need Age, Profit, Wages, Industry etc. Partner and staff survey Educate your clients, then advise! • Step 2 • Implement an effective education program • Broad and/or specific • Step 3 • Offer succession planning advice • Tiered services model

  30. Realising Value Case Study - 2 principals selling equity to a young professional

  31. Staff Investing in YOUR BusinessA mutual opportunity • Preferred exit option for principals not ready to sell • Continued control with lifestyle benefits • Combining experience with enthusiasm • Buyer certainty committed to growing value • Follow a process for a smooth transition

  32. Transition Process Build knowledge, trust and commitment Align goals, values and reach consensus Having a well documented plan Formalise structures and arrangements Receiving ongoing advice and support Education Alignment Strategy Advice Support

  33. Case StudyBackground Information Transition Goals Business income $1.2M Smooth transition WA NEBIT (15%) $180K Not ready to retire, wanting a staged exit Business valuation $760K Transition Event Debt $125K Principalsselling an interest (10% each) Bus value growth pa 4.65% Transition Activities Remuneration of 2P $216K Grant option to buy June 06, exercise July 07 Remuneration of YP $76K Grow income to $1.4M, improve profit by 2.5% Aver age of principals 57 Performance bonus entitlement $15K Age of young prof 34 Parties agree to share growth in value equally

  34. Case Study - Valuation (Current) Formula Result Value Methodology All parties to agree on valuation methodology Current Market Value Principal expectations $900K Business Valuation Profit * Cap Rate $760K Agreed Current Market Value Negotiated between parties $830K Current Weighted NEBIT Profit +/- adjustments $180K Business Capitalisation Rate 4.6

  35. Case Study - Valuation (Current) Formula Result Current Value of Business Interest Agreed share of value $166K Option Fee 10% $17K Recalculate valuation based on the young professional achieving their performance criteria

  36. Case Study- Valuation (Future) Formula Result Estimated Future NEBIT Future profit +/- adjustments $245K Estimated Future Value of Business Profit * Bus Cap Rate $1.127M Estimated Future Value of Interest FVB * Ownership % $225K Agreed Share in Growth Negotiated between parties ($30K) Estimated Future Acq Price of Interest $195K

  37. PrincipalsAre we better or worse off? Net Position $996,600 Net Position $817,000 Net Position $775,000 5.42% 28.6% Sell at Transition Sell Now Transition

  38. *Young professional must have sufficient equity and earnings to support their business investment **“Business” gearing and servicing requirements must not exceed prudential finance standards Young Professional- Funding Granting of Option Option Fee Payable $17K* Exercising of Option Estimated Future Acq Price of Business Interest $195K Transition Costs $5K Option Fee ($17K) Deferred Bonus ($15K) Bank Funding Commitments ($161K)** Personal Funding Commitments $7K*

  39. 225,000 CVBI $166K Performance Bonus $15K 166,000 Value of Business Interest ($) Option Fee @ 10% $17K Incentive Agreement Young Professional - Wealth Creation Performance Criteria: Income $1.4M & Improve Profit to 17.5% Future Value $225K Acq Price $195K Income $1.2M & Profit $180K (15%) Current Value $166K Grant of Option Exercise of Option Pre Transition Estimated Market Value of Business Interest $225K Estimated Acq Price of Business Interest $195K Estimated Capital Growth $30K Estimated Capital Growth 15.4%

  40. “Since we began working with Bstar in June 2004 we have achieved a 30% growth in sales revenue and improved profitability by 24%. I have sold 20% of my business along with 50% of the responsibility and have a lot more money in the bank as a result.” Marie Bermingham Testimonial

  41. Passion Statement • Participating in a dynamic, growth industry • Holding a position of great trust and influence • Becoming an employer of choice • Interacting with “like minded” professionals • Enjoying financial rewards from profit and value optimisation • Finding a balance between business and personal success

  42. Don’t leave succession planning until it’s too late! Grant Bloxham CEO Bstar 0418 796 591 grant.bloxham@bstar.com.au

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